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Overview:

Business Succession Agreements

 

Types of Agreement:

Types of Agreement

Cross Ownership:

Cross Ownership

Self Ownership:

Self Ownership

Related Party Vendors

Deemed Dividends

Risks If No Agreement

Trust Ownership:

Trust Ownership

Tax Implications

"Business Family Will"

Changing Needs

Benefits

Choice of Trustee

Super Buy/Sell

 

Drafting Issues:

Put Options

Call Options

Put and Call Options

Conditions Precedent

Put and Call Options vs. Conditions Precedent

 

Other Issues:

Pre-Agreed Purchase Price

Inadequate Insurance Proceeds

Trauma Buy/Sell Strategy

Simultaneous Deaths

 

Debt Reduction Agreement:

Debt Reduction Agreement

 

 

 

 

 

A "Business Family Will"

Many people describe a Buy/Sell Agreement as a "Business Will".

This is only partly true in the case of Self-Ownership Buy/Sell Agreements.

In reality, a Business Insurance Trust Agreement is a better example of a Business Will or a "Business Family Will".

 

The Nature of a Will

A person's Will gives all of their Estate (including their assets and liabilities) to an Executor.

The Executor is a Trustee who holds all of these assets and liabilities on trust for the Beneficiaries of the Estate.

The Will contains the Testator's instructions or directions as to how they want the liabilities satisfied and the net assets distributed to the Beneficiaries.

A Will therefore is a combination of:

  • a Trust (including an Executor or a Trustee); and

  • a list of directions to the Trustee as to which Beneficiaries the net assets should be distributed to.

The Beneficiaries or Recipients of the net assets are usually members of the Testator's "family" in a personal sense.

 

The Nature of a Business Insurance Trust Agreement

On the other hand, a Business Insurance Trust Agreement addresses issues with respect to not just the Life Insured's Equity in the Business, but risks and liabilities of the Business (and the Continuing Proprietors).

Like a Will, a Business Insurance Trust Agreement is a combination of:

  • a Trust (including a Trustee); and

  • a list of directions to the Trustee as to which Beneficiaries or Recipients the Insurance Proceeds should be distributed to.

However, the Recipients are not just members of the Life Insured's family in a personal sense.

 

The "Business Family"

The broader "Business Family" includes:

  • the Life Insured;

  • their family;

  • any Related Parties that own any of the Equity in the Business on behalf of the Life Insured;

  • the Life Insured's Self-Managed Superannuation Fund (if any);

  • the Business;

  • the Continuing Proprietors; and

  • the Creditors of the Business.

A Business Insurance Trust Agreement therefore is like a (Business) Will that distributes the aggregate Insurance Proceeds amongst this broader Business Family.

 

Identity of the Trustee

In the case of a Will, the Executor or Trustee of the Estate is normally a nominee of the Testator or Life Insured.

However, in the case of a Business Insurance Trust Agreement, the Recipients are more extensive than the Life Insured's Family.

Because third parties are involved, it is desirable that the Trustee is a party other than the Life Insured (or their Executor), who will respect the rights and obligations of the broader Business Family.

While the Executor of the Will is the nominee of the Testator, the Trustee of a Business Insurance Trust Agreement (or Business Family Will) is the nominee of the broader Business Family (at least, the Proprietors of the Business).

A Self-Ownership Buy/Sell Agreement places the Life Insured's nominee in control of the Insurance Proceeds and the Purchase Price (even if the Life Insured did not own the Equity in the Business).

Under a Business Insurance Trust Agreement, the party in control of the Insurance Proceeds is the nominee of the broader Business Family.

 

Choice of Trustee

Click here to read about your choice of Trustee.

 

Control of the Trustee

The members of the Business Family control the Trustee through the directions in the Trust Agreement.

The Trustee therefore acts in accordance with the pre-agreed directions of the entire Business Family, not just one member.

The aim of this structure is to ensure that the pre-agreed expectations of all members of the Business Family are honoured after the death or departure of one of them.

Just as a Will manages the distribution of net assets within the Testator's family, a Business Insurance Trust Agreement manages the distribution of Insurance Proceeds within a broader Business Family.

In both cases, it is paramount that the pre-agreed intentions of the parties to the arrangement are honoured.

It is too late to try to "fix things up" when one of the parties has died.

 

Who Controls the Distribution of the Insurance Proceeds?

Self-Ownership Buy/Sell Agreement

In the case of Self-Ownership Buy/Sell Agreements, the person in control of the Insurance Proceeds (and therefore the implementation of the "Business Will") will be the Executor of the Life Insured's Estate (or the Life Insured personally in the case of a Non-Death Benefit).

The Executor is a Trustee appointed by the Life Insured. This means that an appointee of the Life Insured (or the Life Insured personally in the case of a Non-Death Benefit) will have physical control of the Insurance Proceeds.

Business Insurance Trust Agreement

In the case of a Business Insurance Trust Agreement, the person in control of the Insurance Proceeds will be the Trustee appointed by all of the parties to the business relationship.

This means that physical control of the Insurance Proceeds (and therefore the implementation of the "Business Will") is in the hands of a custodian that has a contractual and fiduciary obligation to comply with the obligations contained in the Trust Agreement.

The Trust Agreement is a "Business Family Will", not just a "Business Will".

 

Protecting the Interests of All Members of the Business Family

A Will administers the Life Insured's Estate for the benefit of the Life Insured and the Beneficiaries nominated by the Life Insured.

A "Business Family Will" administers the Insurance Proceeds not just for the Life Insured or the Business, but for all of the parties that have an interest in the Business and the proper distribution of the Insurance Proceeds (e.g., the Proprietors, any Related Parties and the Creditors of the Business).

The aim of this structure is to ensure that the pre-agreed expectations of all members of the Business Family are honoured after the death or departure of one of them.

Just as a Will manages the distribution of net assets within the Testator's family, a Business Insurance Trust Agreement manages the distribution of Insurance Proceeds within a broader Business Family.

In both cases, it is paramount that the pre-agreed intentions of the parties to the arrangement are honoured.

It is too late to try to "fix things up" when one of the parties has died.

Where the Insurance Proceeds are for business purposes (not just personal needs), there will always be an element of risk if the parties entrust the Insurance Proceeds solely to one Life Insured (or a Executor and Trustee appointed solely by one Life Insured).

 

Copyright: Ian Gray Solicitor

 

 

Adviser Tip

Trust Ownership can do everything that Self-Ownership can do, but Self-Ownership can't do everything that Trust Ownership can do.

See more Adviser Tips

 

 

 

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